Crowd Funding
Crowd funding is one
of the methods for businesses to raise finances in order to grow. It is a
non-bank lending system which means that companies can seek investment without
having to go through the time consuming procedures needed in order to
successfully receive a loan from the bank, and therefore avoid the attributed
costs of the banks services.
Instead, the company
can create an account with one of the many Crowd Funding companies online and
seek loans from individuals who offer their money up, with a set rate of
interest attached. It is done through a marketplace, with live auctions
constantly occurring. From this the business can pick the most desirable offers
to accept.
The individual
investors can choose from a large variety of companies on each website so if
they choose a specific company it is because they find it appealing to them, or
because they think it will be successful.
There are different
reasons for people raising money on the websites, whether it is to increase
finances into the company or to request for donations to charities and
non-profit organisations. Various models are also typical on these websites, in
order to encourage people to offer their money. These are:
-
Reward
Based – This is where an investor receives a form of reward for their
money. It can often be a product that is sold by the company.
-
Loan
Based – When an investor gets a return on the money put up, with varying
amounts of interest.
-
Equity
Based – When an investor expects to get the return on investment, as well
as receiving rewards or intangible benefits.
This industry is
supported by the UK Crowd Funding
Association (UKCFA), which was formed by leaders of companies in this
sector who wanted to act in the interest of all parties involved. They created
a code of conduct in order to regulate the industry better.
Funding Circle
An example of an
online company which provides an online marketplace for crowd funding, it is a
British company which was launched in 2010. As of today (16/07/13),
£125,386,760 has already been lent to businesses through this site, with just
fewer than 50,000 individuals in the U.K. who lend. Like other crowd
funding websites, it is supported and endorsed by Government, local councils
and universities.
The businesses
registered can set the amount they wish to borrow (between £5000 and
£1,000,000) as well as the length of time they wish to pay over. Funding circle
suggests that 77% of the businesses which use their website for funding would
sooner return to them for further finance before seeking out help from the
bank. Investors are on average, set to receive an average net return of 5.8%.
Benefits for
businesses using Crowd Funding
-
It is a fast way to receive finance. And cheaper
than a bank.
-
Allows the owner to maintain control of the
company, without having to give out shares.
-
Businesses have a choice in offers and can
accept the lowest interest rates, getting the best deal for them, at a price
which is acceptable to the investor.
-
It can benefit businesses of all sizes. UKCFA
described the industry as “democratic
finance”. SME’s will find it much easier gain finance using crowd funding
than going to a bank.
-
It is a great way to make contacts, if you link
your project with social media, the investors can become supporters, and then
in turn become customers. It can help increase the profile of the company and
the exposure it gets in the media.
-
You get immediate feedback on your business.
Investment suggests that people believe in your ideas, but the website can also
offer inspiration of how to improve the business, and how it appears online.
-
Allows you to keep in touch with supporters of
your cause. Investors can be contacted and thanked, which would improve the
relationship with a loyal fan base.
Opposing View
Useful websites
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